Chief regulator takes aim at executive pay

Shareholders shunned by boards’ cozy relationship with management.

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The salaries of the five highest-earning executives of a company should be approved by the shareholders, Israel Securities Authority chairman Zohar Goshen said Wednesday.

“The board of directors at companies sometimes approve salary packages that don’t serve the interest of shareholders, including excessive salaries and an inefficient incentive structure,” he said at the Globes Capital Market Conference in Tel Aviv. “Therefore, the authority is launching an initiative that will require the compensation packages of the five highest-paid senior executives of a company to be approved in a special majority vote by the the general shareholders’ meeting after being approved by the board of directors.”

Goshen said salaries and incentives should encourage executives to manage the company in a way that maximizes long-term performance by focusing on real risks.

“This is the main dilemma when determining compensation packages, which should not only reflect short-term income generated but also the long-term risks created by management’s actions,” he said. “For this reason, the structure and mix of salary packages between base salary, bonuses and stock options needs to be examined... so that the package is balanced and won’t create the wrong incentives.”

“In a survey we conducted among 67 companies listed on the Tel Aviv-100 Index,” Goshen said, “we found no direct connection between incentive policy and compensation levels paid by public companies to their top executives compared to achievements and profits. The only connection we found was between salary level and the size of a company.”

He criticized the procedure for determining and approving salary packages because performance targets are not always taken into consideration. There are also conflicts of interest between the controlling shareholder and management, he said.

“Sometimes the controlling shareholder of a company is influencing the process of executive compensation packages to ensure management’s cooperation in advancing his interests at the expense of shareholders,” Goshen said. “Similarly, sometimes board members are entangled in a conflict of interest that limits their objectivity when they are voting on the approval of compensation packages.

“Board directors are invited to the parties of managers and later they need to vote on approving their compensation packages. Hence they are often closely connected to the management and don’t want to spoil the party.”

The ISA’s proposal would also increase transparency, disclosure and responsibility of the boards of directors of companies in setting compensation levels.

“The names of the members of the board who vote in favor or against
compensation packages should be disclosed at all times,” Goshen said.

Also speaking at the conference, Israel Discount Bank chairman Yossi
Bachar said the issue of compensation levels needed to be addressed.

“There is room for treatment of executive salaries in some form,” he
said. “However, regulation should not come in the form of legislation
but in the procedure for setting executive salaries.”

The government announced at the end of April that it is preparing a bill regarding executive compensation.

A private member’s bill to limit executive salaries, proposed by MKs
Shelly Yacimovich (Labor) and and Haim Katz (Likud), seeks to limit the
highest salary in a company to 50 times the lowest salary at that firm.

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